Deposit accounts are bank accounts held at banks and credit unions that allow for safe-keeping of your funds.

Most of these accounts also provide interest while your funds are held, but some accounts like everyday checking accounts, may not.

These accounts come in two distinct types:

1. ⏲️ Time Deposits
2. 🏦 Demand Deposits

Time deposits, such as certificates of deposit, limit access to your funds for a fixed amount of time in exchange for interest paid to you. 

Demand deposits such as money market and checking accounts, provide access to your funds ‘on-demand.’ The bank or credit union will let you withdraw the entirety of your sum without needing permission from them.

You’ll want to note that while the bank or credit union can’t stop you from accessing your funds in demand accounts, they can impose strict fees for doing so. 

There are two primary benefits of deposit accounts:

1. 🔐 Security
2. 💰 Interest (APY)

Security. Although these waters haven’t been tested since the bank collapse of 2008, you can rest easy knowing your funds will be there when you need them. FDIC insurance (NCUA for credit unions) backs up all deposit accounts in the event of credit union or bank failure to the tune of $250,000 per depositor. For joint accounts, deposits up to $500,000 are insured ($250,000 x 2 depositors = $500,000 FDIC coverage).

Interest. Since the bank is using your deposit for commercial endeavors – namely, to loan out to borrowers – it only makes sense that you get a kick back in the form of a dividend for your part in the equation. 

Banks and credit unions compete for consumer deposits with attractive interest rates. The longer the consumer keeps his/her funds with the bank, the higher the interest rate and APY (annual percentage yield) they will receive.

On fixed deposits like CDs, rates generally ascend with terms. So longer duration CDs like 5 year deposits provide higher returns than 12 month deposits. And why shouldn’t they? Consumers should be increasingly rewarded with the duration in which the bank gets to hold their funds.

But that’s not the only reason your money earns more over time. The second factor is “compounding interest.”

Depending on the specific institution you’re banking with, interest is usually compounded daily, weekly or monthly with the proceeds being re-deposited into the account to ‘compound.’ The more frequent the compounding (daily, weekly, monthly) the higher your overall APY or annual percentage yield will be. That’s why when comparing deposit accounts you always want to look at the APY rather than the interest rate to calculate your bottom line earnings.

Now that we understand some of the nuances of deposit accounts, let’s dive into the specifics of each account type.

Certificates of Deposit (Time Deposit)

Certificates of deposit are fixed-rate, time deposits that generally come with terms between 3 months and 10 years. With these accounts you will not have access to funds prior to the deposit’s maturity date. If you do need access, you will incur a fee. These fees generally eat away at some, most, or even all of the interest you’ve accrued on your deposit. In most cases, these fees won’t eat away at your principal, but you’ll have to check with the institution’s fine print to make sure this holds true for your bank of choice.

You’ll also want to set a reminder for yourself to let you know when your CD is about to mature. Banks and credit unions have “grace periods” upon maturity, that generally last around 10 days. During this period you can change the deposit terms or move your funds fee-free to another account. If left untouched, the funds automatically renew into the same deposit product.

When should someone open a certificate of deposit?

• In a falling interest rate environment. Timed deposits come with fixed rates. This can be a good thing or a bad thing depending on how interest rates are trending. In a falling interest rate environment certificates of deposits are a great strategy. In this environment look for longer term maturities to ride out the interest rate downturn. Conversely, in a rising interest rate environment variable rate products are better as their rates rise with the tide.
• When promotional or ‘special term’ deposit products are offered. Some banks and credit unions have promotional deposits that can come with cash bonuses or extremely high rates on certain balances. These should always be considered when looking for FDIC-insured savings vehicles. Some credit unions, and online banks in particular, also offer deposits with special terms such as “No Penalty CDs,” which allow for penalty free access to your funds, or “bump-up” or “step-up CDs” which allow for your rate to rise during the life of the CD. It should be noted that step-up CDs are similar but not identical to bump-up CDs. For bump-up CDs the consumer specifies when the rates get a bump and with step-up CDs the rates rise at intervals set by the financial institution.
• When you don’t need access to your money. Just be sure to pick a term you’re comfortable with as early withdrawal penalties are steep. Also, double check online savings account rates and money market rates before locking in a fixed rate CD. They may be more lucrative than the particular CD term you’re after.

IRA CD (Time Deposit)

IRA CDs are certificates of deposit held within your individual retirement account. Much of what we covered (above) applies to IRA CDs as well, just note you’ll have the added tax-advantage that IRAs offer.

Credit Unions and banks (both offline and online) as well as brokerage firms all offer IRA CDs. They can offer these in the form of traditional IRAs or Roth IRAs.

You’ll want to note that the IRS takes 10% of all sums withdrawn from an IRA account prior to the owner turning 59 and a half. They will make some considerations for new home purchases, emergency or unforeseen payments, and others.

When should someone open an IRA CD?

See above as the same conditions that apply for standard CDs also apply for an IRA CD. 

Be sure to set notifications for grace periods on deposits held within IRA accounts if you plan on moving the funds upon maturity as these can be easier to forget.

Money Market Account (Demand Deposit)

Looking for competitive rates AND access to your money? Try a money market account. 

Unlike CDs, these are demand deposits that allow for full access of your funds – at your demand. 

Accessing your money can generally be done through ATM/debit cards or checks. ACH transfers are also permissible. Just note that per federal regulation D, only six transfers are allowed per month. Check with your individual institution on the fee structure beyond six as it varies. 

Minimum deposit and/or monthly balance requirements for these accounts are generally steeper than traditional savings accounts. In normal interest rate environments rates are tiered so that larger balances receive higher APYs. In less competitive savings environments rates tend to be flat across all balances.

When should you open a money market account?

• When you have larger sums of money and want to earn a respectable interest but still have access to your funds.
• In rising interest rate environments. Money market accounts tend to offer higher APYs than standard savings accounts but often require higher balances. Rates are variable and rise and fall with the overall interest rate environment.

Savings Account (Demand Deposit)

Like money market accounts, savings accounts are on demand deposit accounts that provide access to your money and an interest on your balance. 

Access to your funds isn’t quite as easy as it would be with a checking account, but it’s still available to you if you need it. Some accounts offer ATM or debit cards as well as check writing capabilities, but most online savings accounts do not. 

With online savings accounts you generally get a top tier interest rate but access to your funds is usually restricted to ACH transfers. Again, this varies by institution so check with your bank of choice prior to opening an account.

Same federal Regulation D regulations apply to savings accounts as they do with money market accounts, limiting you to 6 ACH transfers per month. Transfer fees will apply to anything beyond that and, in some cases, your account can be shut down or transitioned into a checking account.

When should you open a savings account?

• When you want to separate funds designated for savings from your everyday spending money. Savings accounts are great for slowly building up funds for a later date. Whether you’re saving for an emergency or a big ticket item you wish to purchase in the future, savings accounts are great tools to use to achieve these goals.
• When you want to safely earn an interest on your savings. Like all other deposit accounts, savings accounts are FDIC or NCUA insured up to $250,000 per depositor. APYs on these accounts, especially online savings accounts, can be quite competitive in normal interest rate environments.

Checking Account (Demand Deposit)

Checking accounts are your everyday bank account. They are used for withdrawing and depositing funds. You can access money easily with a debit or ATM card, check or online transfers. Funds can be deposited digitally via a mobile app or direct deposit from your employer. They can also be deposited physically with cash or check.

You won’t receive much interest on these accounts compared to other deposit accounts, but we have seen promotions featuring cash bonuses for signing up.

If you decide to open a checking account with a large national bank, beware that many impose monthly maintenance fees up to $15/month. Especially for accounts that don’t meet certain balance and/or activity requirements. 

When should you open a checking account?

• When you need to open your first bank account. Because these accounts are designed for your everyday banking needs, it’s likely the first account we open with a bank or credit union. These accounts usually come with tools to help you learn about saving and budgeting as well as facilitate your everyday banking needs.

Rewards Checking Account (Demand Deposit)

These are eye-catching accounts that first started popping up in the product suite of local and community credit unions. The rewards these accounts feature can definitely grab your attention, but be cautious of the fees and activity requirements.

The rewards come in the form of cash bonuses or abnormally high interest rates. The interest rates can be upwards of 3 – 4% APY in this environment, but they’ll likely cap that yield to balances of $10,000 or less.

Here’s what is generally required of the consumer to obtain these rewards:

• Usually 10 to 15 debit card transactions from the account are required. Meaning this will likely have to be your primary account, potentially even replacing your basic checking account.
• You’ll likely have to set up at least one direct deposit OR one automatic ACH automatic withdrawal from the account. So a direct deposit from your employer or an auto pay on your mortgage, student or car loan would likely suffice.
• You’ll also have to go mostly (or completely) digital as the accounts require the use of self-service options like e-statements or online bill pay at least once per month.

As you can see this is no easy feat to obtain the flashy rewards. However, if you can meet the requirements, they may be worth a look.

When should you open a rewards checking account?

• When you’ve demonstrated to yourself that you can meet the monthly requirements of the rewards account through your everyday checking, then it may be worth switching over.
• When the rewards checking account comes without so many strings attached. Occasionally less cumbersome versions of these rewards checking accounts hit the market and can be considered after reading the fine print.